Many companies are operating under the false assumption that diversifying their product lines will automatically lead to cost savings, according to a new study from the University of Surrey. This misconception could be costing firms millions each year, as new findings suggest that traditional methods of evaluating economies of scope are fundamentally flawed.
The research, published in the Annals of Operations Research, shows that traditional methods for evaluating cost savings from diversification – known as “economies of scope” – are flawed. These methods typically compare the costs of producing multiple products together with producing them separately but fail to account for key efficiencies from shared resources.
Instead of using overly simple calculations that often lead to inaccurate and inflated cost estimates, the study proposes a more accurate way of assessing production costs. The research also highlights the importance of rethinking decisions around mergers and producing multiple products. It provides clear guidance on how companies can avoid inefficiencies and improve profitability in today’s competitive markets.
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